Detroit Mayor Mike Duggan (D) recently proposed raising city taxes on vacant or undeveloped land while cutting taxes on buildings by 30 percent. It is hoped that his proposed Land Value Tax (LVT) – a tax on the value of land, rather than what is built on it – could help tackle some of the city’s economic problems, such as deteriorating neighborhoods and high property taxes.
“Confusion is rewarded and construction is punished”
Because typical property tax regimes apply equally to land and any improvements thereon, there is evidence that the tax may discourage investment. This is because construction, renovations and maintenance contribute to higher property values and therefore higher property taxes. This may force some landowners to leave land vacant or allow buildings to fall into disrepair.
This is particularly problematic in Detroit, where land speculation is rampant: by some estimates, speculators (mostly non-Detroit residents) own nearly 20 percent of parcels in the city. And many would rather sit on low-tax properties — some potentially have less than $30 a year in property taxes — than build new homes or business properties.
To make up for lost revenue, the city must shift a relatively large share of its tax burden onto homeowners. In fact, homeowners can face tax bills as high as 15 percent of their household income, which in turn leads to high rates of tax-induced property loss and abandonment. By some estimates, Detroit’s tax evasion affects one in four.
This further fuels speculation by non-residents, who make up the vast majority of purchases at tax auctions where homes are sold.
In the words of Mayor Duggan, “Blatt is rewarded and construction is punished.” In doing so, the mayor hopes to incentivize vacant property owners by taxing their land and using the revenue to ease the burden on many homeowners and businesses.
The city estimates the LVT plan would reduce property taxes for 97 percent of Detroit homeowners and 70 percent of small businesses, with a typical multifamily housing saving 20 percent on their tax bills. In contrast, owners of vacant lots or scrap yards could see their tax bills increase by more than 100 percent.
Advantages and disadvantages of LVTs
Like many other US cities, Detroit has historically undervalued and overvalued its lowest-value homes, disproportionately affecting its black population. After years of overtaxing black homeowners, LVT may help alleviate the excessive tax burden, with greater savings in lower land value neighborhoods with larger black communities due to historic disinvestment in the Red Line.
LVTs can also help address the (nationally) affordable housing shortage. By removing impediments to construction, LVT promotes greater development. This could encourage more housing to be built, especially multi-family housing. An increase in housing supply, combined with lower taxes on landlords, could lower rents for tenants. And more construction can help increase density in cities, with additional environmental and public health benefits.
However, the empirical evidence on LVTs is so far mixed, with some studies showing that LVTs stimulate more development and others finding no significant effect. This is partly because restrictive land use policies can limit development regardless of the tax system. And while LVTs can spur construction, they don’t guarantee more affordable housing. To be successful, any LVT will probably need to be part of a larger strategy that includes inclusionary zoning policies, social housing mandates, or public housing renovations.
There are also political challenges. Owners of parking lots, car dealerships and golf courses typically oppose policies that raise taxes on low-density land. And without attention to equity, LVT proposals could have impacts on farmers or low-income homeowners on large lots. Currently, no major local government in the US uses LVT, and Detroit’s government must be approved by both city and state governments.
But this does not mean that LVTs are politically impossible. The introduction of any new tax system can cause a backlash, but LVT has been successfully implemented in some cities in Pennsylvania, as well as in Hong Kong, Australia, South Africa and other places around the world. LVT, which applies equally to everyone, can be seen as fairer than the current regime in which governments give large tax breaks to developers to subsidize housing construction.
While all taxes have pros and cons, LVTs have the potential to improve access to affordable housing, promote development, and stop blight—all issues in Central Detroit’s broader goals of economic growth and fair tax policy.